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Three Tier Pricing

Disciplines > Marketing > Pricing > Three Tier Pricing

Description | Example | Discussion | See also

Description

Have products that are priced into one of three tiers:

• Cheap: Lowest price possible. Often a stripped-down product that provides minimum functionality. Aimed at people who are extremely price sensitive.
• Standard: Moderate price. Functionality that covers most everyday needs. Aimed at people who are moderately price sensitive, but who will pay for things they will use.
• Luxury: High price. Maximum functionality. Functionality for every need. Aimed at experts or people who are not price sensitive, but are socially sensitive (and hence use the product as status indicator).

Even when you sell single products, do consider into which of these tiers the product fits, and market accordingly.

Example

A cooker manufacturer has cheap, standard and luxury models. They sell most of the standard model, which is not a lot more than the cheap model, for which sales are never high. The luxury model sells well to people who must have the best in their kitchen, even though it has features that are hardly ever used.

A computer company sells the basic product to consumers as a cheap entry system. To more discerning users they sell better computers with a moderate service offer. For higher-end customers, which are often professionals, they include a same-day priority service which brings in good ongoing contract income.

Discussion

Cheap products are for markets where lowest price is important, and where people use price as a primary choice variable. They also act as an entry product, getting people to want the product.

Standard products are for markets where practical functionality is important, and where price is still important. It is often an important as moderate profit margins may be made here, as opposed to the very thin margins in price-first markets. A common strategy is to show that the standard pricing is better value for money than the cheap pricing, and that by paying 'a bit' more, you actually get a lot more product for your money. In doing this, the cheap product acts as a comparator with a key purpose of making the standard product look good value and selling more than if there was no such cheap comparison.

The luxury market appeals to experts and those who are really buying social status. Experts and professionals buy products that will save them time and allow them to perform a wide range of actions. Social buyers often want the product to be expensive so they can boast about how much they have spent on it, while their actual use may be very small.

Having products in two or three tiers allows you to up-sell, getting the customer to close on a lower-tier product and then convincing them to buy a higher-tier item, such that they focus more on the difference in price between the tiers rather than the absolute price of the destination tier.

See also

Value Pricing, Zone Pricing